Standard & Poors announced that Argentina is now in default on its bonds. However, this may not mean that offers by a group of private Argentine banks to purchase the bonds are off the table.

Also see: As Argentina’s Banker Delivers Proposal, Will Holdouts Bend?

Argentina Flag

 

Argentina’s negotiations with Paul Singer’s Elliott Management

Bloomberg is reporting that negotiations “with U.S. hedge funds led by Paul Singer’s Elliott Management Corp. continued past the country’s grace period.”

Minutes later The Wall Street Journal reported the meetings had ended.

“An Argentina default is expected to be short-lived at this point and shouldn’t have any major implication for the country,” Mauro Roca, a senior Latin America economist at Goldman Sachs in New York, said in the report. “There’s the expectation that a deal with holdouts will be worked out soon.”

As Standard & Poors formally announces Argentina is in default, Paul Singer’s NML Capital was involved in intensive negotiations with an Argentine private bank group regarding an offer to purchase the Argentine bonds.  Holdouts are unlikely to receive a high payout offer either before or after the technical default because the offer coming from Argentina’s private bankers is likely not to have overt Argentine government cash involvement.

The big question is if Argentina officially defaults, can holdouts like NML collect on their credit default derivatives insurance and sell their bond claims?

This being the case, speculation is the deal is likely not awash in excess capital. This is because if Argentina pays anything additional to the bond holders it might also obligate the same payment to be given to all bond holders.

Argentina’s default: Sovereign nations to ignore US jurisdiction

If Singer plays hardball and forces Argentina into default, it could ultimate encourage other sovereign nations to ignore US jurisdiction which could lead to a default on credit derivative SWAPs insurance.  Singer has forcefully warned that the banks are vulnerable to hidden derivatives risk.  In his most recent investor letter he said the “hodgepodge” of activities banks were currently involved in included “derivatives with notional amounts that total several hundred times the capital at these institutions.”

These derivatives are mostly tied to sovereign government debt.  A default by a government, as Argentina is threatening, could trigger an event when the unthinkable might happen: the banks are liable for their short volatility play.

What’s the limit on this risk?  We still don’t know.  Years after the 2008 derivatives implosion that lacked transparency we still don’t have transparency into the bank’s worldwide time bomb.

“Such instruments are generally reported off-balance sheet and individually range in riskiness, from exposures representing a small fraction of the notional amounts of the underlying reference assets, up to exposures that are the effective equivalent of 100% of notional amounts,” Singer wrote in his most recent investor letter. “There is no additional capital available to support these derivatives.”

When he writes “there is no additional capital available…” do you know what he means?

Who is going to pay for the bank’s risk?  “Of course, we all know that the governments effectively guarantee the banks,” Singer wrote.

As Singer looks at an offer from an Argentine private banker, he could actually be making the decisions at the vanguard of derivatives default.